Oct 2009 Financial News

Jamaica's fiscal deficit could reach 20% of GDP

Oct 07, 2009

The country may already have passed the point of no return, says Barclays Capital

As the country's fiscal and economic plight becomes increasingly precipitous, Barclays Capital, the international investment banking division of Barclays Bank PLC has arrived at a bleak assessment of the Jamaica's fiscal situation.

In the latest research note on Jamaica by the New York-based institution, its analyst unit concludes: " We believe that Jamaica is approaching the point of no return and that it will take more than fiscal adjustments to regain sustainability for the long term. For 2009, we expect interest payments to be 16.0pts of GDP, or more than 60 per cent of revenues. Fiscal sustainability in Jamaica has been under pressure for the past ten years, but we believe that at this time, the IMF is more willing to help Jamaica restructure its debt than to prolong its agony."

Last week Prime Minister Bruce Golding said that in an effort to ensure that the country's plight does not further deteriorate while at the same time making certain concessions to the International Monetary Fund ( Jamaica is seeking to access US$1.2 billion from a Standby arrangement), the public sector may well have to endure a number of cuts in order to contain the escalating public sector wager bill. There are currently 117,000 paid government workers costing the Government around J$200 billion (including services).

The Government has failed to meet its revenue target by $13-billion and its inability to garner receipts from the divestment of assets which was expected to net it some $13 billion makes it situation even more daunting. Compounding matters is a further $16 billion being added to the budget to address a rise in interest payments. The fiscal deficit for the fiscal year to March31,2010 was revised upwards from 5.5 per cent of GDP to a whopping 8.7 per cent of GDP ($94.5 billion, an increase on last year's figure of $75 billion). Planned expenditure now stands at $561.4 billion, $6 billion more than the target. The Government intends to cut $12.7 billion from recurrent expenditure and $6 billion from capital expenditure in order to cover $25 billion more than planned for debt expenses and salary increases. All this comes against a backdrop of the budget being financed by only 55 per cent of revenues. The Government may well be facing a debt to GDP ratio of over 120 per cent come the next fiscal year.

IMF should help to restructure debt rather than loan US$1.2 billion. Barclays Capital, one of the world's most reputable brokerage houses, is calling for a restructuring of Jamaica's debt which now stands at around $1.2 trillion. Alejandro Gristani, credit analyst for Latin America and the Caribbean at Barclays Capital said that it may be more prudent for the IMF to place its emphasis on balance of payment support.

"Of particular concern is that Jamaica's fiscal deficit could reach around 20 per cent of GDP ( with more than 15 per cent of GDP in interest payments). We think it is extremely unlikely that any reform programme will be able to put the country on a sustainable medium-to longer-term fiscal path and believe that the IMF is weighing whether it would be costlier to allow (and maybe help) the country to restructure its debt or to give the Jamaican government the US$1.2 billion that it is soliciting in order to postpone its agony.

"Unfortunately, we believe that Jamaica may have already passed the point of no return and that for the IMF, as well as for the country in the long term, it would be more convenient to assist in a restructuring of debt," was Gristani's unequivocal prognostication of the ailing Jamaican economy.

Barclays Capital is projecting a decline in output of 5.5 per cent for Jamaica this year and a sharp drop of 16.2 per cent in remittance flows, while positing that the current account deficit will still fall from 20. per cent of GDP last year to 12.5 per cent next year because of the steep fall in imports, due to lower oil prices.


Source:
Al Edwards
Jamaica Observer
Wednesday, October 07, 2009

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